Are you entitled to claim both tax relief and grants for R&D?

We get asked this question a lot at Ensors. And the answer is… it depends on a few factors, and they’re not always easy to understand. But it’s possible, with a little knowledge, forethought and planning, to receive grants, and still get tax relief for R&D.

Why can’t some companies get tax relief for R&D?

Usually it’s because they’ve received a grant from the government. EU rules state that Small and Medium sized Enterprises (SMEs) can only claim one state aid. As both R&D tax relief and grants are both considered state aids, this causes an issue.

It’s also important to note that even if a grant is of a limited duration, this rule still stands for the lifecycle of the entire project. This does still mean that a company would still be entitled to an R&D expenditure credit, which is effectively a 12% tax saving. However, that’s not as good as the SME R&D tax relief which effectively offers savings of up to 43.7%.

Are there ways to claim both?

It’s all about the little details. A carefully worded application for a grant can ensure it gets ring fenced. That means receiving the grant won’t taint your potential to receive tax relief. It also depends on how many projects you have, and that you’ve clearly defined which project a grant is for, so other projects can still be eligible. A grant that funds costs which aren’t attributable to R&D shouldn’t prevent an SME from receiving R&D relief. EU funded programmes, like Framework and Horizon 2020, are not classed as state aids.

Before you consider a grant, think about its impact on you tax position

Thinking about funding your R&D with a government grant? Look at the bigger picture first. Receiving a grant of £25k for the first year, for example, might look great, but it could leave you worse off in the long run. Because of that grant, you might get reduced R&D tax relief, which would actually be more than the £25k over the several years the project lasts for.

If that’s the case, it’s probably better to find alternative ways of funding your early research. Although don’t forget that alternative forms of funding may also have an impact on your SME tax relief.

Taking advice from Ensors up front can ensure you’re not disappointed when it comes to receiving the most from your R&D tax relief. Visit the Ensors wesbiteor contact Ann Minson to find out more.